Sirius XM at 17 cents - look out below

The satellite radio company has to deal with Detroit's woes, a tapped out consumer and its own debt. So even at 20 cents a share, the stock's not a buy.

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By Paul R. La Monica, editor at large

Shares of Sirius XM radio have tumbled to well below $1 a share and some analysts worry that the company may be forced into bankruptcy.

NEW YORK ( -- "Brother, can you spare a dime?" During the Great Depression, ten cents could buy a little something for those really hard up.

During this financial crisis, ask for two dimes, and you can get a share of Sirius XM. That's right, the stock of the much-ballyhooed satellite-radio merger has plunged more than 90% this year and was trading recently at just 17 cents.

And now, several analysts wonder if Sirius XM (SIRI) will even be able to last for much longer without a major restructuring.

"The outlook for Sirius XM has grown increasingly worrisome and at the current time looks bleak," said Frederick Moran, an analyst with Stanford Group. "At this point, you have to question whether Sirius XM will survive 2009 in its current structure. There is a likelihood that it could enter bankruptcy."

The company would not officially comment about its stock price and concerns about bankruptcy .

How did it get to this point? Sirius XM was officially formed this July after the Federal Communications Commission finally approved the merger of the nation's only two satellite-radio firms.

The two companies, which charge customers a monthly subscription, have been losing money since their inception because of its many big expenses.

First, there was the huge upfront costs to launch their satellites.

Both companies also spent heavily on marketing to attract customers.

Finally, and most notably, there is the high price tag to lure talent - Howard Stern, for example, has a five-year, $500 million deal that began in January 2006.

Big Three pose big problem for Sirius

The biggest problem is the company's reliance on the auto industry. Sirius XM has deals with all the major car makers to have satellite radios pre-installed in their vehicles.

GM (GM, Fortune 500), Ford (F, Fortune 500) and Chrysler are begging Congress for a bailout and speculation is swirling that one or more of the Big Three may have to file for bankruptcy as auto sales have plunged this year.

And while Detroit's Asian rivals aren't facing near-term cash crunches, it's not as if Toyota (TM), Honda (HMC) and Nissan (NSANY) are enjoying healthy demand. What's more, the credit crunch has made it tougher for people who might want to buy a new car to get an auto loan in the first place.

"The automobile industry is collapsing and the banking industry is collapsing. So even if someone wants to buy a car there's no money to finance such a purchase," said April Horace, an analyst with Janco Partners.

With that in mind, Sirius XM said when it reported third-quarter results last week that it expected subscriber growth to slow in the fourth quarter of this year and in 2009.

The company now expects to end this year with 19.1 million subscribers and 2009 with 20.6 million subscribers. That's only about 8% growth, down from about estimated subscriber growth for 10% this year.

By way of comparison, Sirius, as a standalone business, reported subscriber growth of 38% in 2007 and 82% in 2006.

Horace added that the credit crunch is going to hurt Sirius XM in another key way as well. She said consumers will be less likely to buy satellite radios for their homes or cars from retailers. The Circuit City (CCTYQ) bankruptcy filing is a perfect example of how much demand for consumer electronics has fallen, after all.

And the weak economy may soon have an impact on existing customers, Moran said.

"With a potentially prolonged recession, you have to assume that as existing subscribers come out of their contracts, they may disconnect since they won't have a desire to spend more money right now," he said.

In addition, it seems that changes to the lineup of channels following the merger has angered some customers. CNN Entertainment Producer Todd Leopold blogged about this last week.

Debts in the stratosphere

But what's most worrisome is that Sirius XM has more than $1 billion in debt maturing in 2009, with a $210 million tranche (it was originally $300 million) due in February.

During a conference call with analysts last week, Sirius XM CEO Mel Karmazin said the company hoped to refinance this tranche in the future and that existing lenders understood that "refinancing issues are macroeconomic in nature and not related to any operating failure on the part of Sirius XM."

"The company is actively in discussions with both the holders of our existing debt, as well as a significant number of additional lenders who are considering putting new money into Sirius XM. Diligence is underway by these institutions," Karmazin said.

In addition, chief financial officer David Frear, in response to a question about whether the company had sufficient cash levels, said that the company did.

But Horace said that even if the company is somehow able to refinance this portion of the debt, investors won't be jumping for joy.

"The concerns about overall debt will continue to plague the company and have an overhang on the stock," she said.

But Moran takes it one step further. With the company having more than $3.4 billion in debt overall, he sees very little way for Sirius XM to be able to meet those obligations in this environment. Banks are highly unlikely to lend to the company, he said.

Sirius XM is going to ask investors for approval to sell more stock at the company's shareholder meeting next month. But would there even be any demand?

"We view Sirius stock as a complete risk with no compelling reason to even consider buying shares," Moran said. "Subscriber growth is shrinking rapidly due to lack of consumer interest and record low auto sales. There is not much hope the company can convince buyers they have a viable financial model."

It is also seeking approval of a reverse stock split, which would allow the company to reduce the company's available share count and artificially prop up the stock price, a move that I highlighted in yesterday's column as akin to a desperate Hail Mary pass in football.

So I wonder what Howard Stern thinks of all this? He can't be too thrilled about the stock's plunge. As part of his original deal, he and his agent received 34.375 million shares in Sirius stock and they were awarded another 22.1 million in January 2007 for meeting subscriber target incentives.

Stern is not required to report when he sells Sirius stock so it is impossible to know just how much he currently owns.

But let's have some speculative fun. The last time the company disclosed how many shares Stern and his agent owned was in January 2007. At that time, they had about 39.3 million shares.

Based on the stock price of $3.76 back then, the stake was worth $148 million. Today, that stake would be worth less than $8 million. That's a $140 million loss on paper. Baba Booey!  To top of page

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